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r e b m t e p e S In t h i s i s s u e : C o m p a r a t iv e A d v a n t a g e a n d th e C h a n g in g C o m p o s it io n o f U . S. O u t p u t , E x p o rts, a n d The P arad o x D is tr ic t of B u s in e s s Bank Im p o r t s "R e se rv e s" C o n d it io n s C o m a n d p a r a t i v e t h e C o m E x p o r t s , by John C d v a n t a g e h a n g i n g p o s i t i o n E. A a n d o f I m U . S . O p o u t p u t , r t s L e im o n e In 1971, the U nited States experienced a m erchandise trade deficit for the first time in this century, greatly intensifying concern over the deterioration in the m erchandise trade position. This concern stem s from w idespread belief that the U nited States needs a large m erchandise trade surplus to achieve balance o f paym ents equilibrium . Econom ists and policym akers have pointed to the U. S. inflationary surge since 1965 and the overvaluation of the do llar as m ajor culprits in the disappearance o f the trade surplus. But recently, som e eco nom ists have begun to suspect that structural changes in the e c o n o m y have also contributed to this situation. Som e adherents o f this view have even begun to question the need for a large, perm anent U. S. m erchandise trade surplus.1 In citing structural changes, they note that the share o f national ou tpu t originatin g in g o o d s-p ro d u c in g sectors— agriculture, m ining, and m anufactur ing— has been shrinking, but the share o f service activities has been expanding. From this they hypothesize that the U. S. m ay be lo sin g its com parative advantage in g o o d s but gain in g one in services. Consequently, one w o u ld expect the m erchandise trade balance, over the lo n g run, to trend from surplus to deficit and the surplus on services trade to expand unless inflationary pressures or controls on trade and capital distort these long-run tendencies. The idea that services m ay provide a gro w in g trade surplus m ay surprise those w h o think of barber shops and laundries as typical service industries. But the share o f such labor-intensive services in national ou tpu t has been declin in g.2 Instead, services' share o f total output has expanded because o f the grow th o f private and governm ental services heavily dep end ent u po n educators, scientists, adm inistrators, and other high ly skilled and educated persons. It is the grow th o f these services, w hich provide m ajor sources o f new kn ow le dge and te ch n olo gy for increasing productivity, that som e econom ists have begun to associate with the possibility of an ex pan ding surplus on services trade. Yet g o o d s w ho se produ ction is heavily dep end ent u po n te ch n o lo gy and highly skilled personnel have also increased their o u tpu t share even as the share o f total go o d s o utput has shrunk. Such g o o d s have m aintained a Monthly Review, V ol. L V III, N o. 9. Free su b scrip tio n an d ad d itio n a l c o p ie s availab le u p o n request to the Research D ep artm e nt, Federal Reserve Bank o f Atlanta, Atlanta, G e o rg ia 30303. 134 SEPTEMBER 1973, M O N T H L Y RE V IEW substantial trade surplus despite deterioration in the overall m erchandise trade position.3 Therefore, broad structural shifts from g o o d s to services w ithin o u tpu t and trade cloak com plex structural changes in m any sm aller co m pone nts of go o d s and services. To appraise the hypothesis o f ch an gin g com parative advantage, this article exam ines the structural changes in U. S. exports and im ports of g o o d s and services and their inter relationship w ith structural changes in U. S. output between 1958 and 1971. This tim e fram e permits a com parison of trends du ring the relatively noninflationary 1958-1964 environm ent with 1965-1971, m arked by strong inflationary pressures and increasing overvaluation o f the dollar. The article first analyzes broad structural changes, h igh ligh tin g the role of services in output and trade. It then proposes a hypothetical fram ew ork c o m b in in g elem ents of com parative advantage and e c o n o m ic developm ent theories to explain structural changes and linkages between output and trade. Finally, the article analyzes detailed sectoral trends within the context of this fram e w ork to uncover som e m ajor influences underlying the structural changes in U. S. output and trade. Structural Trends Services' share in national output rose from a p proxim ately 54 percent in 1950 to 64 percent in 1971.4 In contrast, output shares o riginating in m anufacturing, agriculture, and m in in g have trended dow nw ard, and that of construction has rem ained stable (Chart I).5 Services accou nt for approxim ately one-third of total im ports and exports.6 M oreover, between 1958 and 1965, the net balance on service trade m oved steadily from a deficit equal to .15 percent of national output to a surplus equal to .43 percent. Thus, in 1965, services constituted nearly one-third of the total surplus on go o d s and services (Chart II). In contrast, the surplus on m erchandise trade (agricultural, mineral, and m anufactured goods) fo llow ed no discernible trend d u ring this period. After 1965, however, the balances o f both m erchandise and service trade d ro pp ed off sharply relative to output. These com parison s suggest that the traditional focus on m erchandise trade alone has been too narrow to adequately interpret the forces underlying U. S. trading strength. Furthermore, the upsurge in net service exports through 1965, in contrast to the erratic trend of net m erchandise exports, supports the hypothesis that the U. S. trade balance is b e c o m in g m ore service-oriented. The sharp declines in both m erchandise and service trade positions after 1965, as im ports surged, suggest that inflationary pressures and overvaluation of the dollar severely distorted these long-run trends. FEDERAL RESERVE BANK OF ATLANTA CHART I National Output by Sectoral Shares Services Constr. Mining ’6 5 Note: All g u r e s a r e in c u r r e n t d o lla r s . ’7 0 N a t io n a l o u tp u t is d e fin e d in t e x t. Despite parallel shifts from go o d s to services in both output and trade, trends in trade have not paralleled trends in output shares. For instance, the balance of agricultural trade m oved from deficit to surplus and the m inerals trade deficit narrowed, relative to national output, between 1958 and 1971, although the output shares of both sectors declined. These diverse trends suggest that linkages between o utput and trade are too com plex to be derived from co m paring trends in broad sectors of o utput and trade. Hence, forces underlying structural changes in both output and trade m ust be analyzed before the hypothesis that the U. S. trade position is b e c o m in g m ore service-oriented can be fully evaluated. Relationships Between Production and Trade Econom ists have traditionally linked output and trade through the theory of com parative advantage. A c c ord in g to this theory, each area or nation tends to specialize in the production of those go o d s and services that it can create with greatest efficiency CHART II Sectoral Trade Balances, 1958-1971 °/o o f n a tio n a l o u tp u t Total Services % 1.0 o f n a tio n a l o u tp u t Total Goods 135 (i.e., in w hich it has a com parative advantage). In the m odern version of the theory, differences in com parative advantage stem from differences between regions or nations in their mix of productive inputs. For example, if a nation possesses a higher capital to labor ratio than other countries, it (1) tends to specialize in p rod u cin g capitalintensive g o o d s and services and (2) exports these products for labor-intensive imports. In recent years, econom ists have attem pted to expand the traditional categories o f capital and labor to include physical capital (e.g., machinery), unskilled labor, hum an capital (investm ent in education and training in specialized skills), te chn ology (i.e., application of new kn ow le dge to create new products or to produce old go o d s and services m ore efficiently), econom ies of scale,7 and natural resources. D e m a n d patterns also play an essential role in determ ining the equilibrium mix of production, exports, and im ports am o n g nations. In fact, large differences in dem an d patterns, m ore typically present between nations of w idely differing per capita incom e levels, m ay occasion trade patterns opp osite to those predicted by com parative advantage.8 O v e r time, national econom ies experience contin u ou s and broadly sim ilar shifts in the structure of output that are related to changes in both dem and patterns and the mix of productive inputs.9 These changes, in turn, bring about changes in a nation's trade pattern.10 (Differences am o n g nations in tim ing and pace m ake specializa tion and trade possible.) Thus, nations at early stages of eco n o m ic deve lopm en t are strongly oriented toward agriculture, m anufacture o f sim ple co nsum p tio n goods, and retail trade, w hich satisfy basic dem ands for food, shelter, and clothing. These first tw o activities depend heavily upon natural resources, and all three use relatively unskilled labor. A s countries develop, trade becom es m ore extensive and m ore rou ndabou t production m ethods emerge. C onsequently, m ining, transporta tion, and industries processing raw materials for other industries begin to expand their share of output. These sectors typically require heavy investm ent in physical capital and experience increasing eco nom ies of scale. A t m ore advanced levels of developm ent, consum ers— fin ding it easier to satisfy basic needs in terms of food, shelter, and clothin g— dem and a w ider variety of m ore sophisticated g o o d s and services. Produ cin g sectors also search for increasing efficiency through m ore m odern eq uip m e nt and im proved organization. Thus, business and professional services and m anufactur ing industries p ro d u cin g new, highly sophisticated go o d s contribute an increasing proportion to total output. These sectors use highly skilled and 136 educated w orkers and te ch n o lo gy and produce these inputs for other sectors of the econom y. In sum, changes in the mix of productive inputs play a significant role in ch a n gin g the structure of output. Thus, national eco nom ies typically m ove from produ ction using raw materials and unskilled labor tow ard produ ction characterized by eco no m ies of scale and intensive use of physical capital and, finally, tow ard activities that use hum an capital and te ch n o lo gy intensively and produce them for other sectors. C h an ge s in the com position of d em an d as per capita incom es rise also interact w ith changes in the mix of p ro ductive inputs to produ ce changes in the structure of output. How ever, the im portance of dem and shifts versus input shifts in b rin gin g abou t structural o utput changes are not w ell understood. Even less appreciated is the role dem an d shifts play in brin ging about changes in the mix o f productive inputs them selves (e.g., changes in the saving rate on capital form ation, changes in the dem an d for education on the d eve lo pm en t o f hum an capital and technology, and changes in the dem an d for leisure on the sup ply o f labor). This fram ew ork suggests that the highly d e veloped U. S. e c o n o m y sh ou ld be increasingly oriented tow ard the produ ction and export of business and professional services and tow ard sophisticated c onsum e r g o o d s and capital e q u ip ment produ ced by techn ology-in ten sive m anu fac turing industries. Sim ilarly, g o o d s and services heavily dependent upon natural resources or unskilled labor sh ou ld decline in relative im p o rta n c e w ithin output and exports. But im ports m ay also becom e m ore service- and less go ods-o riented because of shifts in the c o m p o si tion of dem and. Hence, w hile the theory o f c o m parative advantage im plies that sectors increasing their output shares sh ou ld trend tow ard a trade surplus and contracting sectors sh ou ld trend tow ard deficit, the uneven pace of shifts in the co m p o sitio n of dem an d m ay contradict this expectation for som e sectors. C h an ge in the mix o f productive inputs and c o m p ositio n of dem an d in U. S. trading partners m ay also strongly influence trends in U. S. trading patterns. In p u t M ix , D e m a n d C o m p o sitio n , and Structural C h a n g e Let us n ow analyze trends of U. S. o u tpu t and trade in individual sectors w ithin the context o f changes in mix of productive inputs and in co m p o sitio n of dem and. (All trends are expressed relative to output in order to abstract from the influence of the total e c o n o m y's grow th. For example, although a sector's im ports m ay be g ro w in g in absolute terms, these im ports w ill exhibit a d e c lin in g trend relative to national o utput if the rate of grow th is less than that of total dom estic output.) SEPTEMBER 1973, M O N T H L Y REVIEW CHART III Agriculture Agriculture's share of total output has declined largely because consum ers spend a shrinking proportion of their incom es on foo d as their incom es rise. The dow ntrend in agricultural im ports also reflects this behavior, although U. S. barriers against im ports o f certain agricultural products (e.g., beef and tom atoes), m ay have contributed. But the shrinking im portance of noncom petitive c o m m oditie s (especially coffee and cocoa) w ithin total agricultural im ports suggests that dem and shifts ou tw eighed trade barriers in determ ining this trend. The gro w in g relative scarcity o f the traditional agricultural inputs, labor and land, w ithin the mix of U. S. productive inputs has also contributed to agriculture's declin in g share in total output and has u ndou btedly dam pen ed agricultural exports. (Significantly, the United States has agricultural deficits with Latin Am erica, Australia and N ew Zealand, and Africa, areas with a relatively greater abundance o f land and/or labor.) M oreover, land and labor used in agriculture have been attracted to other sectors paying higher returns on their use. U. S. farmers have adopted new production m ethods that substitute technologically advanced eq uip m e nt and techniques, im proved m anagem ent, and large scale operations for labor and land.11 These changes have slow ed the relative dow ntrend in agricultural exports and, helped by sales of agricultural products under various governm ental program s (e.g., PL 480 sales to less-developed nations), eventually permitted a surplus in agricultural trade to em erge.12 M inerals The depletion of m any mineral deposits du ring e co n o m ic grow th and, in recent years, environm ental concerns have raised costs and restrained U. S. mineral production. Yet mineral export grow th has kept up with grow th in total output because of the very large U. S. share in glob al deposits of copper, phosphate rock, sulfur, and coal. These four co m m o ditie s account for the bulk o f U. S. mineral exports. M in in g of these com m odities, especially coal and sulfur, is technology-intensive. In recent years, coal has also benefited from increasing econo m ies o f scale. Nevertheless, mineral exports have consistently fallen short of mineral im ports because of the depletion of other U. S. natural resources and the large dom estic dem and for petroleum and natural gas, w hich dom inate total U. S. mineral production. Im port quotas, particularly on petroleum , have u ndou btedly suppressed mineral imports, although recent and prospective changes in U. S. energy policies m ay reverse this FEDERAL RESERVE BANK OF ATLANTA 137 trend. Yet shifts in the co m po sitio n of dem an d may have also dam pen ed mineral im ports and production. Thus, sophisticated go o d s and services, the m ost rapidly gro w in g output sectors, rely less heavily upon raw materials in creating value added than som e of the older go o d s sectors. M oreover, energy consum ption, w hich is heavily dependent upon mineral fuels, has trended d o w n w ard relative to G N P since 1947.13 The decline in output shares of utilities and transportation services, accounting for about one-half of gross energy c o n su m p tion,14 also im plies that dem and for mineral fuels has been declin in g relative to total dem and. M an u factu rin g Trends in m anufacturing can be better understood by gro u p in g together m anufactured g o o d s of sim ilar production and dem and characteristics— sim ple consum er goods, interm ediate goods, and fabricated metal goods. Sim ple consum er g o o d s 15 industries process raw materials satisfying basic consum er needs of food, clothing, and shelter. Their output norm ally depends heavily upon low skilled labor but only to a lim ited extent upon econom ies of scale or new technology.16 Interm edi ate industries also process raw materials but sell the bulk of their output to other producers. They typically require heavy investm ents in plant and eq uip m ent (physical capital) and tend to benefit from substantial internal econom ies of scale. M etalfabricating industries produce sophisticated go o d s that satisfy rapidly rising dem ands for recreation, travel, education, and leisure or provide capital inputs to other industries. The m anufacture of these go o d s requires large inputs o f hum an capital and te chn ology and relies less on physical capital and econom ies o f scale than interm ediate industries. The steadily d e clin in g trend in sim ple consum er g o o d s ' share of national output (Chart IV) and their persistent trade deficit (Chart V) suggest a com parative disadvantage stem m ing from relatively intensive use of raw materials and unskilled labor. The tendency for consum ers to spend less of their bu dget on sim ple consum e r g o o d s as incom es rise has undo u bte dly d am pen ed ou tpu t grow th and accounted for a stable trend in sim ple consum er go o d s im ports until the outbreak of inflation in 1965. Thereafter, such im ports accelerated in response to excess dom estic dem and, substantially w id e n in g the trade deficit for these goods. The share of interm ediate g o o d s in o u tp u t has also declined, though m ore irregularly than sim ple consum er goods. Im ports and exports from 1958 to 1964 fluctuated around a flat trend and were roughly in balance. This pattern suggests a slow ly em ergin g com parative disadvantage stem m ing from a rising scarcity of dom estic raw materials partially offset by e co n o m ie s of scale and intensive use o f physical capital. In addition, the stable level of im ports until 1965 and the slow ly declin in g share of output suggest that dem an d for interm ediate go o d s has grow n m oderately less than total dem and. The sharp rise in im ports and equally sharp decline in output share after 1965 reflect an increasing substitution of im ports for dom estic production in response to surgin g excess dem an d in the econom y. The trade surplus and rising trends for exports and output shares (except du rin g recessions) for m etal-fabricated products suggest a strong U. S. com parative advantage in these goods, w hose productive processes dep end heavily upon hum an capital and technology. The rising trends for im ports and output also im ply above-average grow th of dem an d for these products. But ac celerating im ports after 1965 resulted in a decline in the trade balance o f fabricated metal products. M oreover, accelerating imports, by substituting for dom estic production, m ay have contributed to the sharp dow nturn in this sector's share o f d o m estic output after 1968. Services Evaluating the forces u nderlying trends in service output and trade present num erou s difficulties. Problem s o f m easuring o u tpu t are c o m p o u n d e d by substantial differences between service ou tpu t and service trade classification schem es. Nevertheless, w e have attem pted a breakout and co m pariso n of service co m p on e n ts w hich, though crude, suggest that service output and trade patterns change in response to c o m m o n su p p ly and dem and influences m uch like g o o d s-p ro d u c in g sectors. 138 SEPTEMBER 1973, M O N T H L Y REVIEW CH A RT V Trends in Exports, Imports, and Trade Balances for Mfg. Components % of n a tio n a l o utp u t Sim ple Consumer - 1.0 Im p orts E x p o rts Intermediate Im p o rts E x p o rts + ■ 0 2.4 The expansion in services' domestic output share from 1958 onward stems from growth in both private and state and local services, plus an upsurge in Federal services after 1965 (Chart VI). The expansion in private services derives entirely from professional and technical services (i.e., educational, legal, miscellaneous professional, miscellaneous business, medical and health, and nonprofit organizations). Output shares of other private services (i.e., repair, personal, private household, lodging, and entertain ment services) remained stable or declined. These latter are very labor-intensive but utilize relatively little human capital.17 Educational services account for approximately two-thirds of the expansion in state and local output18 and, currently, for more than 40 percent of state and local expenditures. General government, civilian safety, welfare administration, and health and medical services make up most of the remain ing expansion in that sector. In sum, the expansion of both private and state and local governments' services stems from services that use human capital and/or technology intensively in their production processes and provide the main source for adding to the stock of these inputs. A growing body of opinion, supported by limited evidence, holds that fees and royalties and direct investment earnings in trade accounts include payments for a wide variety of services similar to professional and technical services which swell the services' output share.19 (Some service exports only incorporate indirectly domestically produced services. For example, educational 2.0 1.6 CHA RT VI Trends in Components of Services % 1.2 of n a tio n a l outp u t .8 .4 1.8 1.4 1.0 .6 .2 •I FEDERAL RESERVE BANK O F ATLANTA 139 services provide the hum an capital and tech n ology essential for generating fees and royalties and returns on direct investment, but educational services directly exported are prob ab ly quite small.) The large and gro w in g surplus on these services (classified here as technical services) was responsible for the bulk o f the overall surplus on services trade from 1960 onw ard (Chart V II). CHA RT VII Trends in Exports, Imports, and Trade Balances for Service Components % of n a tio n a l o utp u t Hence, the contribution o f technical services to the grow th o f service o utput and exports and the large trade surplus for this sector strongly support the hypothesis that the United States has a significant and gro w in g com parative advantage in services utilizing large prop ortions o f hum an capital and te ch n o logy in their mix o f productive inputs. .8 .4 0 G overnm ental restraints on foreign direct investm ent of U. S. corporations m ay have d am pen ed this com parative advantage. Thus, technical services exports flattened out du ring the m id-Sixties w hen such controls were first im posed. The renewed uptrend o f these exports in the early Seventies is consistent w ith som e relaxation of restraints. The pattern of Federal services in output and trade overw h elm ingly reflects the vagaries in the dem an d for military services (i.e., these trends are relatively independent of the mix o f productive inputs used to produ ce military services). M ilitary expenditures declined relative to output from 1958 to 1965 as "c o ld w a r" hostilities abated but began rising after 1965 in response to the Vietnam conflict. The Federal G o vern m e nt's share o f output m oved correspondingly. M ilitary expenditures have ranged from 80 to 85 percent o f Federal expenditures on g o o d s and services and dom inate exports and im ports o f governm ental services as well. The proportion o f Federal nonm ilitary expenditures to dom estic output has rem ained stable, although their co m p o sitio n has changed. The trend in military sp e n d in g abroad (imports) and consequently the deficit for this sector closely paralleled the pattern of the G overn m e nt's share in total output (i.e., declin in g from 1958 through 1965, then rising in response to the acceleration of Vietnam hostilities). In this article, w e have assum ed that returns on foreign financial assets and paym ents on financial liabilities to foreigners im plicitly include a su b stantial c o m p o n e n t o f paym ents for financial services and, therefore, respond to the sam e dem and and sup ply forces influencing dom estic output o f such services. (Governm ental receipts and paym ents on foreign assets and liabilities are included in these services.) Financial services are relatively labor-intensive and use relatively less physical capital (excluding real estate) and hum an capital than m anufacturing. How ever, the U. S. reputation for possessing one of the largest, m ost efficient financial systems 140 .8 .4 0 Trans. .4 Ex p o rts B a la n c e ‘'■ ' ■ ■ ■ ■ ■ m Travel i a T g i + 0 im p o rts .4 Ex p o rts + 0 U U U U IJ 1 T U 1 J U U U U u u B a la n c e ’60 '65 ’70 SEPTEMBER 1973, M O N T H L Y REVIEW in the w orld im plies substantial external econom ies of scale. The net surplus of financial services until the late Sixties suggests a U. S. com parative advantage, perhaps based on external eco no m ies o f scale. The sudden contraction of this surplus after 1965 and the appearance of a deficit in 1969 largely reflect the inflationary b o o m after 1965 w hich swelled U. S. credit dem an ds and induced substantial capital inflow s from abroad. A s a result of paym ents to foreigners for use of these funds, financial service im ports surged dramatically. Recycling o f U. S. dom estic funds via the Eurodollar market because o f Regulation Q interest ceilings added to paym ents to foreigners. In essence, R egu la tion Q frustrated the dom estic production of financial interm ediation services and further ex panded dom estic dem and for such services from abroad.20 By constraining exports, governm ental regulations m ay have also contributed to the deterioration of the balance of financial services. Thus, c o in cid in g with the im position o f the Interest Equalization Tax on U. S. purchases o f foreign securities and the Volu n tary Foreign C redit Restraint Program, w hich constrained the increase of U. S. com m ercial bank financial claim s on foreigners in the mid-Sixties, the grow th rate of returns on foreign portfolio investm ents (exports) slowed. Transportation services claim a sm all and shrinking share o f dom estic output. Exports have m aintained a flat trend relative to output, but a slow ly rising im port level has open ed up a sm all deficit suggesting a slow ly em ergin g U. S. com parative disadvantage in transportation services. The sector is characterized by heavy investm ents in physical capital, econom ies of scale, and an indirect dependence on mineral resources via fuel consum ption. The contraction in share of total output and the lim ited rise of im ports also im ply that dom estic dem and for transportation services has grow n relatively slowly. The rising level of travel im ports reflects gro w in g Am erican expenditures on travel abroad as incom es rise. The nearly equal rise in travel exports indicates that foreign dem and for travel in the United States has also grow n m ore rapidly than dom estic output. Nevertheless, the deficit in this c o m p o n e n t in relation to the overall level of trade im plies a strong U. S. com parative disadvantage rooted in the labor intensity of travel-related services. The contraction of the output share of travel-related services— hotels, retail trade, and personal services— tends to bear out this inference.21 from the m id-Sixties onw ard, the analysis of patterns o f change in the structure of U. S. output and trade in this study supports the hypothesis of a long-run shift in U. S. com parative advantage from go o d s to services. Nevertheless, this conclu sion by itself is m isle adin g since it overlooks the com plex set of changes in patterns of output and trade that have resulted from a ch an gin g mix o f productive factors and, to a lesser extent, shifts in the com po sitio n o f total dem and. Thus, services that utilize and reproduce hum an capital and te chn ology account for the gro w in g surplus in service trade and the expansion of services w ithin dom estic output. G o o d s relying heavily upon the use of hum an capital and technology, m ainly m etal-using m anufactured goods, have also increased their share of dom estic output and m aintained a strong trade surplus. In contrast, g o o d s and services relying heavily upon inputs o f raw materials or labor have tended to d w in d le in relative im portance within dom estic output and to register trade deficits. M inerals, sim ple m anufactured consum p tion goods, w holesale and retail trade, and som e private services fall into this group. Sectors characterized by heavy investm ents in physical capital and eco no m ies of scale, especially interm ediate m anufactured g o o d s and transportation services, have declined som ew hat m ore slow ly in relative im portance within dom estic output and have tended to develop sm all trade deficits.22 O n the other hand, dem and for military services rather than com parative advantage has determ ined trends in the share o f Federal G o vern m e nt services in total output and the trade deficit in governm ent services. M oreover, after 1965, the acceleration in U. S. dem an d for military services sim ultaneously exaggerated the expansion of output and im ports of services, thereby distorting the longer-run p o si tive relationship between the expansion o f service output and of the trade surplus in services. Trends in agricultural output and trade m eanw hile have reflected shifts in both dem and and com parative advantage. C h ange s in dem and away from raw agricultural products have resulted in the declin in g relative im portance of agricultural output and imports. But a substitution of physical capital, technology, and econo m ies of scale for traditional inputs o f land and labor has slow ed the relative decline of agricultural exports and resulted in a persistent surplus position in the Sixties for the first time since the early Twentieth Century. How ever, serious distortions in these long-run trends after 1965 resulted in a deterioration in the overall trade balance, affecting prim arily C o n c lu sio n s and Im plications the balances for m anufacturing and services. First, the acceleration in Vietnam -related military Taking into account distortions introduced by cum ulative inflation and overvaluation of the dollar expenditures sw elled service im ports dramatically. FEDERAL RESERVE BANK OF ATLANTA Second, inflationary credit dem an ds generated in 141 the U. S. by the sudden expansion o f military expenditures and retention of Regulation Q further expanded service im ports through an en suing rise of interest paym ents to foreigners. Finally, U. S. exchange controls dam pen ed the export grow th of financial, technical, and professional service exports. The dim in ish in g surplus on m anufacturing trade, reflecting a sharp deterioration in the trade balance for all three com ponents, apparently stem m ed from the cum ulative im pact of inflationary pressures after 1965 and the overvaluation of the dollar. Realignm ents of exchange rates in the past three years and the prospective term ination of U. S. restrictions on capital ou tflow s should help reduce these distortions and perm it long-run trends to reassert themselves. How ever, since ec o n o m ic adjustm ents from these realignm ents are far from com plete, several years m ust pass before the explanatory hypothesis put forth in this article can be fully tested. The patterns of output and trade exam ined here im ply that international adjustm ent involves m ore than m onetary and fiscal policies to control aggregate dem and. Eco n om ic policies m ust also accom m odate structural adjustm ents in trade that stem from o n g o in g shifts in the patterns of dem and for g o o d s a n d services and in the mix of productive factors w ithin dom estic econom ies. Thus, international adjustm ent cann ot be achieved independently o f m easures that facilitate internal resource adjustm ent to these sh ifts.* FOOTNOTES 'See Lawrence B. Krause, "Trade Policy for the Seventies," Columbia Journal of World Business, January-February 1971; Robert A. Bennett, "Roosa Sees U. S. Economy in Major Shift," American Banker, November 18, 1971; and Robert E. Lipsey, "The Current International Competitive Position of the United States," The Conference Board Record, April, 1972. -Throughout this article, national output is defined as total national income less the rest of the world component as shown in relevant issues of the U. S. Department of Commerce, Survey of Current Business. National income is the value of final goods and services, less capital depreciation, indirect business taxes, and certain other "nonincome" charges. To obtain the contribu tion to national income from a specific economic sector, we must add what is left after deducting from the total value of sales of each firm in that sector the amount of the above charges, plus purchases of goods and services from other firms. In contrast, exports and imports are classified according to the total value of output actually sold in international commerce by a specific industry. For example, in addition to the value added by the textile firms themselves, the value of textiles exported includes the value of fibers, transportation, etc., purchased by the textile industry in order to produce the exported product. 8Peter G. Peterson, The United States in the Changing World Economy, Council on International Economic Policy, December 27, 1971, Washington, D. C. Mn contrast, services claimed only 42 percent of GNP in final demand terms in 1971. These figures differ because a large portion of net output of service industries becomes input to goods-producing industries and is included in the value of goods reaching final demand. 5lt should be pointed out that national income and its components deflated by the GNP deflator show that the share of national output originating in manufacturing has increased during the Sixties. Nevertheless, the presumption of underestimation of real product in the services sector, stemming from very difficult methodological and data problems involved in measuring many types of services, raises serious doubts about the validity of using deflated rather than current dollar measures as a better indicator of the trend in manufacturing's share of total output. (See Martin L. Marimont, "Measuring Real Output for Industries Providing Services: OBE Concepts and Methods," in Production and Productivity in the Service Industries, Victor R. Fuchs, ed., National Bureau of Economic Research [New York and London, 1969].) Moreover, the increasing proportion of white-collar workers in total manufacturing employment (many of whom perform tasks similar to those performed by workers in the business and professional service industries) suggests that a growing proportion of manufacturing output, whether measured on a deflated or current dollar basis, incorporates indirectly an expanding volume of services. “Commodity exports and imports are classified according to the U. S. Standard Industrial Classification basis as are the detailed industry sectors for national income. Commodity trade figures on this basis are only available from 1958 onward, although 142 commodity trade on the Standard International Trade Classifica tion goes back for many years. For the years 1958 through 1970, data were taken from the U. S. Department of Commerce, U. S. Commodity Exports and Imports as Related to Output, for selected years. Data for 1971 were taken from the U. S. Bureau of the Census U. S. Exports of Domestic Merchandise, SIC-Based Products and Area, Report FT 610, 1971 Annual, and U. S. Imports for Consumption and General Imports, SIC-Based Products and Area, Report FT 210, 1971 Annual. Service exports and imports are derived from U. S. Department of Commerce balance of payments data in relevant issues of the Survey of Current Business and do not conform to the Standard Industrial Classification. Economies of scale may be of several types. Internal economies result when a plant or firm is able to reduce unit costs of production by expanding output. External economies result when costs are reduced because of an expansion of the industry, the reduction in transport costs associated with the spatial concen tration of producers and markets, or the growth of specialized services accompanying local expansion of output. External economies of scale tend to be closely associated with urbaniza tion. Most empirical studies that take into account scalar economies only attempt measurement of internal economies of scale. sSee H. Robert Heller, International Trade: Theory and Empirical Evidence (Englewood Cliffs, New Jersey; Prentice Hall, Inc., 1968), chapters 4 and 5. "See, for example, the works of Simon Kuznets, especially "Quantitative Aspects of the Economic Growth of Nations," Part II, Part III, and Part VII in selected issues of Economic Development and Cultural Change and Hollis B. Chenery, "Patterns of Industrial Growth," American Economic Review, September, 1960, pp. 624-654. ' “Evidence relating changes in goods output to changes in the composition of merchandise trade may be found in Simon Kuznets, "Quantitative Aspects of the Economic Growth of Nations: Part X. Level and Structure of Foreign Trade: Long-Term Trends," Economic Development and Cultural Change, Vol. 15, No. 2, Part II, January, 1967, and Alfred Maizels, Industrial Growth and World Trade (Cambridge, England; The University Press, 1963). "F or a description of this complex process in selected regions of the southern United States, see William H. Nicholls, "Indus trialization, Factor Markets, and Agricultural Development," Journal of Political Economy, Vol. 69 (August, 1961), pp. 319340, and references cited therein. 12The balance on crude foodstuffs began registering persistent deficits in 1909. See John M. Letiche, Balance of Payments and Economic Growth (New York, Augustine M. Kelly, 1967). The concept of agricultural trade in this article, while predominantly consisting of crude foodstuffs, also includes nonfood, raw agricultural commodities. By way of comparison, the Department of Commerce end use classification of agricultural trade, which includes some processed food products, shows a mostly negative SEPTEMBER 1973, M O N T H L Y REVIEW tendency from 1923 until 1960, followed by a persistent surplus thereafter. See William H. Branson and Helen B. Junz, "Trends in U. S. Trade and Comparative Advantage," Brookings Paper on Economic Activity, No. 2, 1971. state and local governments' shares in national income. However, we have made inferences about the composition of these services from the functional distribution of governmental expenditures on goods and services. ,3This downtrend is measured by the ratio of gross energy con sumption (in thousands of B.T.U.'s) per dollar of 1958 Gross National Product. Actually, this downtrend was interrupted by a sharp increase in energy consumption between 1967 and 1970. However, the ratio dropped again in 1971 and is projected to continue dropping until the year 2000. See Walter G. Dupree, Jr., and James A. West, United States Energy Through the Year 2000, U. S. Department of the Interior, December, 1972, pp. 6 and 13. 19The nature of fees and royalties strongly suggests an intensive use of human capital. Thus, they include payments for sale of intangible property rights (patents, techniques, processes, formulae, designs, trademarks, copyrights, franchises, manufacturing rights, etc.) and professional, administrative, and management services, and rental of tangible property. (This description is from the U. S. Department of Commerce, Bureau of Economic Analysis, Survey of Current Business, June, 1971, pp. 51-52.) Earnings on direct investments may well include disguised payments for many of these same or related services. Thus, a recent U. S. Tariff Commission study points out that numerous factors may distort a rational allocation of foreign investment related revenues between technical services and earnings on investments. The study also provides evidence of a positive relationship between the rate of growth of foreign direct investment and the technological intensity of U. S. multinational corporations. See U. S. Senate, Committee on Finance, Implications of Multinational Firms for World Trade and Investment and for U. S. Trade and Labor, (Washington, 1973), Chapter VI, "Technology, R & D, and the Multinational Firms," pp. 550-604. 14lbid., p. 7. 1!!Simple consumer goods consist of the two-digit SIC categories of food, tobacco, textiles, apparel, furniture, printing, rubber, and miscellaneous manufacturing. Intermediate goods consist of lumber and wood, paper, chemicals, petroleum refining, stone, clay and glass, and rubber and plastics. Fabricated metal goods consist of metal fabricating, nonelectrical machinery, electrical machinery and equipment, transportation equipment and ordnance, and instrument industries. 16Evidence on the consumer orientation and relative factor intensities with regard to capital, human capital, technology, and internal economies of scale of manufacturing industries for two- and three-digit SIC-based categories of manufacturing may be found in G. C. Hufbauer, "The Impact of National Characteristics & Technology on the Commodity Composition of Trade in Manufactured Goods" and in The Technology Factor in International Trade, Raymond Vernon, ed., National Bureau of Economic Research, (New York, 1970), pp. 212-223. 17This assertion is based upon the proportion of professional, technical, and kindred workers to total employed workers for these industries. These data may be obtained from the U. S. Bureau of the Census, Occupation by Industry 1970, Table 1. In this article, all references to human capital intensity for service industries are based on these data. 18National income statistics do not provide a breakout of the different component services that make up either Federal or -°Private payments on financial instruments (imports) declined dramatically in 1971 but were partially offset by skyrocketing payments on U. S. Government liabilities to foreigners. This shift basically reflects the movement of dollars from private to central bank hands as speculative pressures against the dollar mounted in foreign exchange markets. 21Other private services show a small but rising trade surplus. However, the heterogeneity of services in this component (which includes insurance, communications, and consulting services as well as payments related to diplomatic and other miscellaneous services) precludes any meaningful inferences about underlying demand and supply forces. “ Evidence of a negative relationship between net commodity exports and the ratio of physical capital to labor may be found in Branson and Junz, op. cit., p. 328. August 15, 1973 BANK OF ST. JOHN A N D BRANCHES Reserve, Louisiana Began to remit at par. August 21, 1973 B an k A n n o u n ce m e n ts CENTRAL BANK OF SOUTH DA YT O N A South Daytona, Florida Opened for business as a par-remitting nonmember. Officers: Fred Sinclair, president; Walter D. Compton, vice president and cashier. Capital, $600,000; surplus and other funds, $400,000. August 1, 1973 FIRST G EO RG IA BANK August 22, 1973 Atlanta, Georgia Tallahassee, Florida Admitted to membership in the Federal Reserve System as a merger of the First Georgia Bank, Atlanta, Georgia, and the Bank of Fulton County, East Point, Georgia. Opened for business as a member. Officers: Edward K. Walker, chairman; Jerry L. McDaniel, Jr., president; Michael M. Fields, vice president; Lucy J. Tacot, cashier. August 1, 1973 August 22, 1973 THE GULF NATIO NA L BANK N O R T H W O O D BANK OF WEST PALM BEACH BR O W A R D NATIO NA L BANK OF PLANTATION West Palm Beach, Florida Plantation, Florida Opened for business as a par-remitting nonmember. Officers: C. Robert Stock, president; William A. Lord, vice president; Betty Jean Kidder, cashier. Capital, $960,000; surplus and other funds, $484,000. Opened for business as a member. Officers: Robert B. Lochrie, chairman; Terrence E. Reilly, president; Carl W. Cross, cashier. Capital, $300,000; surplus and other funds, $300,000. FEDERAL RESERVE BANK OF ATLANTA 143 T o f by h e B P a r a d o x a n k W illia m N. " R Cox, e s e r v e s " III In accounting, "re se rve s" are funds set aside for future use, as a corporation typically sets aside funds for paying taxes or replacing w o rn -o u t equipm ent. In military tactics, "reserves" are troops deliberately held out o f the front line to meet a break-through or exploit an opening. In national defense, "reserves" are trained civilians w h o can be called to military service in an em ergency. In each o f these contexts, the m eaning o f "re se rve s" is consistent and clear: They constitute a backstop, a stock o f additional resources held for contingencies, a precaution against running out. W e m ight expect, therefore, that "reserves" w o u ld serve a sim ilar function in the context of m odern banking. Like all businesses faced with uncertainty, banks d o h old additional resources for contingencies, especially the contin gen cy o f w idespread w ithdraw als of custom er deposits du ring a brief period. W h e th e r the deposits are w ithdraw n by a transfer o f currency through the teller's w in d o w or a transfer o f funds to another bank, the bank still has to m ake paym ent. In the extreme and unusual case w hen paym ent cannot be made, the bank fails. To provide for the contin gen cy of large unexpected w ithdraw als, every bank holds additional resources in readiness. But there is a paradox here. The assets w e have com e to call "b a n k reserves" d o n o t serve as additional resources held to pay off w ithdraw als and to protect against bank failure, at least for the m ost part. O n the other side of the paradox, the additional resources banks d o h old to meet w ithdraw als— their reserves in a functional sense— are not usually called "b a n k reserves." So "b a n k reserves" do not serve as a true reserve, but other resources do. This paradox raises m any questions, som e of w hich are answ ered below. If "b a n k reserves" aren't really reserves in the sense o f b e in g extra resources held for use in contingencies, then w hat are they? A m ore descriptive term m ight be "im m o b iliz e d assets." By law and regulation, each m em ber bank m ust dep osit en o ugh funds with its regional Federal Reserve Bank to equal specified prop ortions of the deposits custom ers hold with the bank itself.1 The funds deposited at the Fed are thus assets w hich the bank cannot lend to custom ers or invest in securities. They are im m ob ilized in the sense that banks cannot invest them elsew here at a profit. D o e s this m ean that "re se rv e " balances dep osite d w ith the Fed are useless to the bank except for satisfying the regulatory requirem ents? N o t necessarily. For instance, banks often settle debts a m o n g them selves— debts that arise from interbank clearing of checks, transfers o f funds through the Fed's wire system, etc.— by accepting credits to or a llo w in g charges against their "re se rve " accounts. This and other considerations im ply that banks w o u ld m aintain w ork in g balances at the Fed even in the absence of "re se rve " requirements, so that som e of the required "re se rv e " balances serve a dual purpose as far as the dep ositin g bank is concerned. 1Each bank's currency holdings, or vault cash, also count toward meeting "reserve" requirements. Nonmember banks must meet somewhat similar requirements imposed by state banking authorities, but not in the form of deposits with the Fed. 144 SEPTEMBER 1973, M O N T H L Y REVIEW The "reserve b a la n c e s" are available, then, in the sense that one bank can pay another by askin g the Fed to transfer funds from its "re se rv e " account to another. Right? Right. In this sense, the Fed is a bank for banks. For that matter, a m em ber could ask the Fed to clean out the account and deliver the proceeds in currency, if it w anted to. If the fu n ds a bank deposits w ith the Fed are available in this way, then w hy are the funds im m ob iliz e d ? W h y cannot a bank use the "re se rv e " fu n ds as true reserves for contingencies? The funds are technically available, in the sense that a bank can draw on its "re se rve " account. But the funds used to meet Fed reserve require m ents are effectively im m ob ilized because if the bank draw s them out,2 it thereby fails to meet the reserve requirements established under the Federal Reserve Act. This is illegal.3 But the level o f each bank's law ful required reserves varies w ith the level of the bank's deposits, d o e s it not? Yes, that's correct. So w hen a ban k's deposits fall, then the bank's reserve requirem ent w o u ld fall too, leavin g som e of the reserve deposits n o longer im m ob ilized. True? True in part. U nder ou r system 's fractional reserve requirements, a m em ber bank w o u ld typically be required to im m ob ilize 10 cents at the Fed for each dollar o f dem and deposits (checking accou nt balances). So if a dollar in deposits is w ithdraw n by a custom er, 10 cents is indeed "freed u p " by the reduced reserve requirements. But to pay off a custom er, the bank has to co m e up with m ore than just 10 cents on the dollar; it has to com e up with the w ho le dollar. "R e se rv e " balances at the Fed, in this case, are o nly 10-percent reserves in the sense of being m obilizable to meet such deposit w ithdrawals. The bank m ust lo o k so m e w here else for the other 90 cents. W o u ld it be correct to say, then, that bank "r e serves" held at the Fed are not there to protect the b an kin g custom er, then? Except for the 10 cents on the dollar, that is correct.4 2This is true except in the peculiar case where the bank converts reserve balances into vault cash. 3Very occasionally, a bank fails to meet its reserve requirements at the Fed for a week or two. It then comes under administrative scrutiny and pays a penalty interest rate on the amount of its deficiency. 'And except in the eschatological sense. If a bank fails, its assets including “ reserves" are distributed among its depositors and other creditors. So "reserves" do not protect much against failure, but they do have some value if failure occurs, similar to a bank's capital and surplus. FEDERAL RESERVE BANK OF ATLANTA Then w hat does serve as a true reserve for banks if not the "b a n k reserves" w e have been discu ssing? This is the other side of the paradox. W h a t resources does a bank have to meet custom er dem ands for w ithdraw als? Each bank has three lines of defense. First, the bank can draw on its liquid assets, in clu d in g reserve-account balances at the Fed held in excess of requirements, inclu ding the bank's ow n deposits at other banks, and in c lu d in g readily m arketable short-term investm ent securities and loans. Second, each bank has lines of credit against w hich it can borrow : from other banks in the form of interbank loans, from the pu blic in the form o f interest-bearing certificates of deposit, and, in the case o f m em ber banks, from the Fed through the so-called discou nt w indow . The third line of defense, the m ost fu n d a mental, is the com bination of m anagem ent prudence, regulatory exam inations of that prudence, and, ultimately, deposit insurance from the F D IC . N o w let's g o back a bit. If bank "re se rve s" held on deposit at the Fed are not truly reserves in the sense of protecting the bank or the bank custom er, w hat d o they d o ? They serve another function, that of providin g the Federal Reserve with the m eans of controlling the overall level of bank deposits and credit.5 But if bank "re se rve s" aren't really reserves in the usual sense of that w ord, then w hy are they called reserves? Basically because today's "re se rve " balances at the Fed are the direct institutional descendants of earlier form s of reserves— form s w hich did indeed function as reserves in the usual sense of the word. Before the C ivil W ar, for example, bank notes circulated as m oney m uch as bank deposits do to day. The m ore reputable banks assured the circula tion of their notes as m oney by standing ready to convert them into go ld coin or other w ell-esteem ed notes, m uch as a bank today stands ready to convert its deposits into currency or credits at another bank. To assure this convertibility, the m ore rep utable antebellum banks, therefore, held in reserve stocks of go ld coin (called specie) or notes issued by other banks. The relationship between the level of such reserve stocks and the am oun t of the bank's notes ou tstan din g w as determ ined not by law, but by prudence. Safer banks had higher ratios of reserves to bank notes, w hich tended to m ake their notes m ore acceptable to the public.6 ■ “See "Controlling Money with Bank Reserves," this Review, April 1973. By controlling the amount of reserves available to member banks as a group and by controlling the reserve-to-deposit ratios each member bank must meet, the Fed can limit the total deposits in the banking system. Competition among the banks impels them to issue deposits up to this limit. “This sort of arrangement was not peculiar to pre-Civil War American banking; it has been traced back to European financial institutions in the Fifteenth Century. 145 S i x t h D i s t r i c t S t a t i s t i c s S e a s o n a l l y A d ju s t e d (A ll d a ta a re in d e x e s, u n le s s in d ic a t e d o th e r w ise .) L ate st Month One Month Ago Two M onths Ago One Y ear Ago SIX T H D IS T R IC T July Ju ne Ju ne June 162 180 189 191 160 164 239 184 158 166 153 183 146 135 151 138 Ju ly Ju ly 673 615 661r 570r 679 564 590 494 July Ju ly Ju ly Ju ly Ju ly Ju ly Ju ly July Ju ly Ju ly Ju ly Ju ly Ju ly Ju ly July Ju ly July Ju ly July Ju ly Ju ly July July Ju ly Ju ly 125 114 112 101 110 111 111 124 107 117 111 120 111 127 142 108 129 132 122 132 136 134 100 134 86 125 114 112 102 111 111 111 123 107 117 110 120 111 127 141 108 129 131 122 131 136 134 99 132 84 125 114 112 103 110 110 111 123 107 116 110 120 110 126 139 106 129 132 123 131 135 134 102 131 86 121 111 111 102 108 110 110 119 105 112 108 115 109 119 130 107 124 125 118 126 130 130 100 126 86 Ju ly 3.7 3.8 3.8 4.0 Ju ly July July Ju ly Ju ly Dec. June Aug. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. Apr. 1.8 40.8 242 281 203 188 84 114 292 244 188 288 297 223 164 306 349 200 191 207 232 289 445 770 454 1.8 40.7 275 308 242 187 80 115 291 242 188 284 294 223 164 307 349 200 191 207 234 285 436 772 459 1.7 40.6 203 276 131 186 79 114 289 239 186 282 287 222 162 306 348 200 191 207 231 283 436 778 453 2.4 41.1 196 257 136 168 86 126 269 234 185 266 290 215 164 299 311 193 183 185 200 267 398 650 413 Ju ly Ju ly 238 223 234 221 231 216 184 170 Ju ly July Ju ly 198 175 246 195 173 236 194 171 234 169 150 190 F IN A N C E AND BAN KIN G Lo an s* All M em ber B a n k s ......................... Large B a n k s ........................................ Deposits* All M ember B a n k s .............................. Large B a n k s ........................................ B an k D e b its*/** ................................... M anufacturing Ju ly Ju n e 158 205 160 224 155 209 145 145 Ju ly Ju ly Ju ly Ju ly Ju ly 115 113 116 118 72 115 112 116 115 70 115 112 116 117 80 112 110 113 112 75 Payrolls Nonfarm Em ploym ent . . . . M anufacturing ......................... N onm anufacturing . . . . C o n s t r u c t i o n ......................... Farm E m p lo y m e n t ......................... U nem ploym ent Rate (P ercent of Work Force) . . Avg. W eekly H rs. in Mfg. (Hrs.) 4.3 41.4 4.3 40.5 4.4 40.8 Ju ly Ju ly Ju ly 219 190 214 214 186 205 213 185 194 178 165 168 . July June 164 197 161 214 156 149 145 159 . , . . Ju ly Ju ly Ju ly Ju ly Ju ly 144 121 148 179 114 142 120 146 178 103 141 118 145 177 105 134 115 137 156 104 . Ju ly Ju ly 2.7 40.9 2.8 40.9 2.8 40.8 3.7 41.7 July Ju ly Ju ly 268 230 284 263 224 271r 259 224 267 201 191 222 160 174 154 178 156 185 145 117 Ju ly Ju ly Ju ly Ju ly Ju ly 121 109 127 126 82 122 109 128 126 81 122 109 128 126 86 119 107 124 126 78 Ju ly Ju ly 3.8 40.6 3.7 39.7 3.8 40.4 3.9 40.7 Ju ly Ju ly Ju ly 239 185 261 232 182 264 231 183 261 181 152 201 Ju ly Ju ne 149 159 147 234 143 143 138 122 Ju ly Ju ly Ju ly Ju ly Ju ly 113 104 115 93 75 113 104 114 92 76 114 105 115 97 76 111 104 113 92 83 Ju ly Ju ly 5.6 42.0 6.2 41.6 6.0 4 1.4 5.9 42.3 Ju ly Ju ly Ju ly 214 172 192 214 173 187 211 169 175 161 156 153 Ju ly Ju n e 181 202 182 118 178 205 165 156 Ju ly Ju ly Ju ly Ju ly Ju ly 121 126 119 110 83 121 126 119 109 81 122 126 120 113 82 119 123 116 112 91 FIN A N C E AND BAN KIN G Member B an k L o a n s .................... Member B an k D eposits . . . . B ank D eb its** .............................. M anufacturing P a y r o l l s ..............................Ju ly Farm C a sh R e c e i p t s ...................................June EM P LO YM EN T Nonfarm Em ploym ent . . . . M anufacturing ......................... N o n m a n u f a c tu r in g .................... C o n s t r u c t i o n ......................... Farm E m p lo y m e n t ......................... U n em ploym ent Rate (P ercent of Work Force) . . Avg. W eekly Hrs. in Mfg. (H rs.) F IN A N C E AND BAN KIN G M em ber B an k L o a n s .................... M em ber B an k D ep osits . . . .............................. B an k D eb its** L O U IS IA N A IN COM E M anufacturin g Pa yro lls . . . Farm C a sh R e c e i p t s .................... EM P LO Y M E N T Nonfarm Em p loym en t . . . . M anufacturing ......................... N o n m a n u f a c tu r in g .................... C o n s t r u c t i o n ......................... Farm E m p lo y m e n t ......................... Unem ploym ent R ate (P erce n t of Work Force) . . Avg. W eekly H rs. in Mfg. (Hrs.) F IN A N C E AND BAN KIN G M em ber B an k Lo an s* . . . . M em ber B an k D ep osits* . . . B an k D e b its*/** ......................... M IS S IS S IP P I M anufacturing P a yro lls . . . . Farm C a sh R e c e i p t s .................... EM P LO Y M E N T E M P LO Y M E N T 4.3 40.6 EM P LO YM EN T IN CO M E 146 Ju ly Ju ly Member Bank L o a n s .................... Member B an k Deposits . . . . Bank D eb its** .............................. ALABAMA Nonfarm E m p l o y m e n t ......................... M anufacturin g ................................... N o n m a n u f a c tu rin g .............................. C o n s t r u c t i o n ................................... Farm E m p lo y m e n t ................................... One Y ea r Ago F IN A N C E AND BAN KIN G IN CO M E M anufacturing P a yro lls .................... Farm C a sh R e c e i p t s .............................. Two Months Ago IN COM E EM P LO YM EN T AND PR O D U CTIO N Nonfarm E m p l o y m e n t .............................. M anufacturing ........................................ Nondurable G o o d s .............................. F o o d ....................................................... T e x t i l e s ............................................. Apparel ........................................ P aper ............................................. P rinting and P u b lish in g . . C h e m i c a l s ........................................ D urable G o o d s ................................... Lbr., Wood Prods., Furn. & Fix . Stone, C lay, and G la ss . . . . Prim ary M e t a l s ......................... F ab ricated M e t a l s ......................... M a c h i n e r y ................................... Transportation Equipm ent Nonm anufacturin g ......................... C o n s t r u c t i o n .............................. Transportation ......................... T r a d e ............................................. F in ., ins., and real est. . . . S e r v i c e s ........................................ Fed eral G overnm ent . . . . Sta te and Local Governm ent. Farm E m p lo y m e n t ................................... U nem ploym ent Rate (P ercent of Work Force) . . . . Insured U nem ploym ent (P ercent of Cov. E m p . ) ......................... Avg. W eekly Hrs. in Mfg. (Hrs.) . . C onstruction C o n t r a c t s * ......................... R e s i d e n t i a l .................................................. All O t h e r ....................................................... E le ctric Power Production** . . . Cotton C o n s u m p t i o n * * ......................... Petroleum P r o d u c t i o n * * .................... M anufacturing Production . . . . Nondurable G o o d s .............................. Food ............................................. T e x tile s ........................................ Apparel ........................................ Pap er ............................................. Printing and Pu b lish ing . . C h e m i c a l s ................................... D urable G o o d s ................................... Lum b er and W o o d .................... F u rn itu re and F ix tu re s . . Stone, C lay , and G la s s . . . P rim ary M e t a l s ......................... Fab ricated M e t a l s .................... N o n electrical M achinery . . E le ctrica l M achinery . . . . Transp o rtatio n Equipm ent One Month Ago U nem ploym ent Rate (P ercent of Work Force) . . Avg. W eekly Hrs. in Mfg. (H rs.) IN CO M E AND SP E N D IN G M anufacturing P a y r o l l s .............................. Farm C a sh R e c e i p t s ................................... C r o p s ............................................................ Livesto ck .................................................. Instalm en t Credit at B a n k s*/1 (Mil. $) New Lo an s .................................................. R epaym en ts ............................................. Latest Month SEPTEMBER 1973, M O N T H L Y REVIEW L ate st Month One Month Ago Two M onths Ago One Y ea r Ago Ju ly Ju ly 4.4 40.4 40.7 40.3 41.1 Ju ly Ju ly Ju ly 225 193 227 195 219 217 181 163 252 164 159 Late st Month O ne Month Ago Tw o M onths Ago One Y ea r Ago EMPLOYMENT U n em ploym ent R ate (P erce n t of Work Force) . . Avg. W eekly H rs. in Mfg. (H rs.) Nonfarm Em ploym ent . . . . M anufacturing ......................... N o n m a n u f a c tu rin g .................... C o n s t r u c t i o n ......................... Farm E m p lo y m e n t ......................... U nem ploym ent Rate (P ercent of Work Force) . . Avg. W eekly H rs. in Mfg. (H rs.) F IN A N C E AND BAN KIN G M em ber B an k L o an s* M em ber B an k D eposits* B an k D e b its*/** . . . . . . . . . . July . . Ju ly . . Ju ly . . Ju ly . . Ju ly 123 115 128 121 93 124 116 128 121 93 124 116 128 122 84 119 112 123 120 88 . . . July . Ju ly 3.2 40.8 3.0 40.5 2.9 40.6 3.7 40.8 Member B an k Lo a n s* . . . . . . Member B an k Deposits* . . . . . B an k D e b it s * / * * .............................. . . . Ju ly . July . Ju ly 221 182 191 219 178 198 214 178 183 180 163 161 . . TEN N ESSEE FIN A N C E AND B AN KIN G M anufacturin g P a y r o l l s .........................July Farm C a sh R e c e i p t s ...................................June 165 202 states 147 156 **D a ily average b asis fP relim in a ry data i-Revised N.A. Not ava ilab le Note: Indexes for bank debits, construction contracts, cotton consumption, employment, farm cash receipts, loans, petroleum production, and payrolls: 1967 = 100. All other indexes: 1957-59=100. S o u rces: M anufacturing production estim a ted by th is Bank; nonfarm , mfg. and nonmfg. em p., mfg. payro lls and hours, and unem p., U .S . Dept, of Labor and cooperating state ag e n cie s; cotton consum ption, U .S. B ureau of C e n su s; construction co n tracts, F . W. Dodge Div., M cGraw-Hill Inform ation Sy stem s Co.; petrol, prod., U .S . B ure au of M ines; ind ustria l use of ele c. power, Fed. Power Com m .; farm ca sh receipts and farm em p., U.S.D .A . Other indexes based on data co llected by th is B an k. All indexes ca lcu la te d by th is B ank. 'D ata benchm arked to Ju n e 1971 Report of Condition D e b i t s t o D e m a n d D e p o s i t A c c o u n t s In s u r e d C o m m e r c ia l B a n k s in th e S ix t h D is tr ic t (In T h o u s a n d s o f D o lla r s ) P ercen t Change P ercent Change Ju ly 1973 From July 1972 July 1973 Ju ne Ju ly 1973 1972 Bartow -LakelandW inter Haven Daytona B ea ch Ft. LauderdaleHollywood . . . Ft. M yers . . . . G a in e sv ille . . . J a ck so n v ille . . . . MelbourneTitusville-Cocoa M iami .................... O r l a n d o .................... P ensaco la . . . Sa raso ta . . . . T a lla h a sse e . . . Tam pa-St. Pete . W. Palm B ea ch . Albany .................... A tlanta .................. Augusta . . . . Colum bus . Macon .................... Sa van nah . . . . Alexandria Baton Rouge Lafayette . . Lak e C h a rle s New O rleans . . . . Biloxi-Gulfport Ja ckso n . . . . Chattanooga Knoxville . N ash ville . . . . . . . . . . . . . . . Ju n e 1973 From 1973 from 1972 3,662,288 95,059 345,964 1,030,921 658,327 219,626 3,323,085 100,427 330,191 1,035,244 577,406 210,117 2,769,381 81,190 257,365 866,423 503,880 161,626 + 10 - 5 + 5 - 0 + 14 + 5 +32 + 17 + 34 + 19 +31 + 36 +21 + 18 + 19 + 14 + 22 + 27 806,763 469,924 716,103 347,569 591,631 329,470 + 13 + 36 + 36 + 43 + 26 + 25 1,837,522 288,132 241,684 3,856,659 1,776,008 308,846 241,649 3,641,502 1,466,863 213,535 191,272 3,118,999 + + + 3 7 0 6 + 25 + 35 + 26 + 24 + 17 + 35 + 20 + 22 427,911 6,979,296 1,563,379 437,262 520,392 855,923 3,930,396 1,234,521 446,998 6,418,014 1,473,773 432,957 502,901 763,134 3,812,678 1,141,515 341,191 4,998,964 1,192,727 371,511 332,951 604,157 2,909,793 853,817 - 4 + 9 + 6 + 1 + 3 + 12 + 3 + 8 + 25 + 40 + 31 + 18 + 56 + 42 + 35 + 44 + 27 + 28 + 22 + 11 + 49 + 44 + 25 + 37 187,176 15,280,487 520,411 431,569 540,315 537,783 194,594 15,184,118 496,861 406,285 515,173 504,621 162,706 10,667,057 409,416 363,273 453,096 420,169 + + + + + 4 1 5 6 5 7 + 15 + 43 + 27 + 19 + 19 + 28 + 19 +41 + 18 + 11 + 18 + 19 259,919 1,413,581 276,126 227,204 4,420,809 225,932 1,295,321 254,304 212,866 4,086,837 208,285 1,093,787 226,914 195,154 3,330,676 + 15 + 9 + 9 + 7 + 8 + 25 + 29 + 22 + 16 +33 + 20 + 13 + 21 + 9 + 12 280,701 1,466,436 268,126 1,390,882 215,913 1,098,534 + 5 + 5 + 30 + 33 + 23 +25 1,286,820 949,133 3,182,193 1,210,253 846,598 3,141,170 945,746 759,538 2,667,549 + 6 + 12 + 1 +36 + 25 + 19 +21 + 20 + 20 5 + 11 + 15 OTH ER C E N T E R S Anniston . . Ju ne 1973 Ju ly 1972 1973 from 1972 Ju ly 1973 June 1973 180,955 74,841 175,124 71,148 119,906 58,121 + 3 + 5 + 51 + 29 + 31 + 28 168,488 70,210 194,952 40,542r 988,644 1,808,967 129,056 57,611 141,522 37,471 r 735,602 1,406,729 + 11 + 7 + 3 + 9 + 11 + 1 + 45 +31 + 42 + 18 r + 49 + 30 + 31 + 26 + 34 + 19 r + 38 + 19 164,506 102,883 166,700 19,409 141,130 72,296 39,793 56,790 142,880 98,963 162,501 96,591 179,908 22,667 126,714 65,919 47,522 67,223 139,004 94,583 148,519 90,595 148,890 22,815 105,615 51,566 31,350 47,869 123,286 84,468 + 2 + 7 - 7 -1 4 + 11 + 10 -1 6 -1 6 + 3 + 4 + 11 + 14 + 12 -1 5 + 34 + 40 + 27. + 19 + 16 + 17 + 13 + 21 + 18 + 2 + 29 + 23 + 25 + 43 + 16 + 13 18,942 11,131 95,192 62,917 28,092 38,353 16,546 10,882 77,054 53,163 25,472 38,504 14,149 8,490 60,550 49,341 15,218 31,902 + 14 + 2 +24 + 18 + 10 - 0 + 34 + 31 + 57 + 28 + 85 + 20 + 5 + 25 + 36 + 13 + 59 + 13 . . 137,797 76,050 137,548 53,515 133,233 67,402 113,730 51,280 114,921 64,920 102,733 47,764 + 3 + 13 +21 + 4 + 19 + 17 + 34 + 12 + 22 + 20 + 19 + 6 . . 139,059 78,368 46,981 139,563 67,691 38,019 131,110 59,088 37,556 - 0 + 16 +24 + 6 + 37 + 25 + 18 + 24 + 6 B ristol . . . . Johnson City Kingsport . . . 116,492 188,371 259,987 114,982 166,638 254,935 116,145 146,029 216,010 + 1 + 13 + 2 + 0 + 29 + 20 - 0 + 16 +17 Dothan Selm a STAN DARD M ETRO PO LITA N ST A T IST IC A L A R E A S ** Birm ingham . . . G adsden . . . . H untsville . . . M o b i l e .................... . Montgomery . . . T uscalo o sa . . . Y ea r Y ea r to . . . . . . . . B radenton . . Monroe County O cala . . . . St. Augustine St. Petersburg . Tam pa . . . . Athens . B runsw ick Dalton . Elberton G a in e sv ille Griffin . LaG range Newnan Rome . Valdosta . . . . . . . . . . . . . . . . . . . . . . Abbeville . . B un kie . . . . Ham mond . New Iberia . Plaquem ine . Thibodaux . H attiesburg . Laurel . . . . Meridian . . Natchez . . PascagoulaMoss Point V icksb urg . Yazoo C ity . strict Total Alabam a . Florida Georgia . . L o u isia n a 1 . M issis sip p i1 T e n n e sse e 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,613 75,188 200,084 44,187 1,097,947 1,824,458 . 74,993,722 71,494,120r 57,084,222r + 5 +31 + 26 8,604,741 . 25,892,208 21,152,663 7,913,681 3,201,718 . 8,228,711 6,625,552 8,040,573 24,459,076r 19,556,779r 20,877,609 15,632,055 6,078,048 7,284,519 2,504,236 2,994,069 7,838,274 6,687,552 + 30 + 32 + 35 + 30 + 28 + 23 + 20 + 26 + 34 + 22 + 20 + 19 + + + + + + 7 6 1 9 7 5 1 District portion only r-Revised Fig u re s for som e areas differ sligh tly from p relim inary figures published in "B a n k Debits and Deposit T urnover" by Board of G overnors of the Federal R eserve System . " C o n f o rm s to SM SA definitions a s of Decem ber 31, 1972. FEDERAL RESERVE BAN K OF ATLANTA 147 D i s t r i c t B u s i n e s s C o n d i t i o n s Signs o f co n tin u in g m oderation in the e c o n o m y's gro w th rate inclu ded slackenin g gro w th in ban k loans, slo w in g construction activity and retail sales, and cutbacks in agricultural produ ction. H ow ever, a further decline in the u n em p loym en t rate, sustained c o n su m e r bo rrow in g, and rising farm cash receipts indicated sources o f c o n tin u in g strength. Bank le n d in g contin u ed to m oderate, particularly decline in soybean prices in July offset gains at the sm aller banks. A t the larger District banks, throu ghou t the livestock sector. Lower feed prices business loans, sluggish in recent m onths, strength checked the rise in prices paid by farmers. Cash ened slightly in July w hile real estate loans were receipts through the first half o f 1973 sh ow ed a noticeably one-fifth weak. Total deposit grow th, running slightly behind the pace of previous m onths, re m ained large strong, C D 's , with tim e acco u nting deposits, for the bu lk particularly of current gain over last year's level, althou gh Florida's gain w as m oderated by low er citrus prices. Recent forecasts indicate substantial increases in soybean and rice produ ction in 1973, but p ro d u c growth. O n A u g u st 16, this Bank raised its discou nt tion of peanuts and cotton w ill be dow n. Indicated broiler production is d o w n 8 percent from a year rate from 7 to ago and even m ore in Georgia. 7 V 2 percent. By late A ugust, the prim e rate at m ost District banks had increased to 93A percent. There were signs o f softness in the construction N e w c o nsum e r instalm ent loan s rem ained at high levels in all categories. How ever, large repaym ents sector, th o u gh the value o f construction contract aw ards and construction em p lo ym en t rem ain w ell of previously incurred debt resulted in July's total credit ou tstan din g b ein g the sm allest in 24 m onths. Retail sales of autos and other co nsum e r g o o d s above levels recorded a year ago. How ever, c o n tapered off slightly but were substantially higher struction e m ploym ent w as dow n slightly from early- than the co m parable year-ago level. 1973 levels. Residential aw ards rem ained near historic high levels, but the residential sector w as beset by rising rates on construction and perm anent loans, as deposit inflow s at thrift institutions slow ed dramatically. Prices received by farmers declined in July for A contin u ed expansion in lab or d e m a n d n u d ge d the u n em p lo ym en t rate d o w n to 3.7 percent in July. Em ploym ent inched upw ard, w ith the gains centered in non m anu facturin g industries. Food processing, textiles, apparel, and chem icals were the o n ly in dustries recording job declines. Factory hours the first tim e in several m onths, but prelim inary changed little; a strike-related decline in A la b am a data indicate another sharp increase in August. A w as largely offset by gains in other states. N o te : D ata o n w h ic h st a te m e n t s a r e b a s e d h a v e b e e n a d ju s te d w h e n e v e r p o s s i b l e to e lim in a te s e a s o n a l 148 in flu e n c e s. SEPTEMBER 1973, M O N T H L Y REVIEW
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